January 1, 2026, is fast approaching, bringing with it a wave of economic questions. Beyond concerns over the future of the stock market—after record highs in 2025—the weakening shekel, the prospects for economic recovery, and the growing impact of artificial intelligence on the labor market, the most immediate issue affecting all Israelis will be tax policy.
Many questions remain unanswered and will likely stay that way until the state budget is approved. As in the past three years, 2026 is expected to begin under a temporary, non-updated budget framework, this time following two years of a prolonged and difficult war.
Uncertainty surrounds which planned Finance Ministry measures will take effect as early as the day after tomorrow, and which will be delayed, and for how long. Alongside new austerity steps planned for 2026, the public is also awaiting promised benefits, including Finance Minister Bezalel Smotrich’s pledge to expand income tax brackets for working Israelis.
The ministry has drafted an economic arrangements bill that includes seven chapters of proposed tax changes set to take effect in early 2026. However, many of these reforms still face legislative hurdles, and some have previously failed to pass in final Knesset votes.
What’s approved and what isn’t
Here is a breakdown of which measures have been approved and will come into effect immediately, which will be applied retroactively during the year and which are still awaiting Knesset approval.
Several tax measures approved in advance will officially come into force at the start of 2026:
- Pension tax exemption: The tax exemption on pension income will increase slightly, as part of a pre-approved plan. The exemption rate will rise from 57% to 57.5% in 2026, to 62.5% in 2027, and from 2028 onward will reach up to 67% on the initial portion of monthly pension payments. The upcoming change is minimal and largely symbolic.
- Income tax brackets: Income tax brackets have been frozen again for 2026. This means taxpayers will pay more income tax than they would have under inflation-adjusted brackets—effectively a 3% increase across the board. For example, instead of paying 10% on income up to ₪7,010 and 14% on the next bracket up to ₪10,060, the brackets remain unchanged, translating to a financial loss. The same applies across all brackets: 20% up to ₪16,150, 31% up to ₪22,440, 35% up to ₪46,690, 47% up to ₪60,130, and an additional 3% surtax on income above that, bringing the top effective rate to 50%. This freeze will cost individuals hundreds to thousands of shekels annually.
- Value-added tax (VAT): VAT will remain at 18%, up from 17% the previous year, despite Smotrich’s promise last summer to roll it back to 17%. The higher rate applies to all goods and services.
- Purchase tax on electric vehicles: The purchase tax on electric vehicles will rise to 48% in 2026. Previously set at 45% through the end of 2025, the tax was initially expected to jump to 52% under a new proposal—or, absent agreement, default to the standard 83% for gasoline vehicles. However, due to opposition in the Knesset Finance Committee, the tax will increase more moderately to 48%, and the benefit cap will be reduced from ₪30,000 to ₪22,000. Lawmakers say the compromise will continue to support the market entry of electric cars, especially affordable models.
Several proposed tax reforms and financial policies are still awaiting Knesset approval and will not take effect at the start of 2026:
- Property tax: A proposed 1.5% annual tax on non-agricultural vacant land has not passed and is unlikely to be approved soon. Though cleared by the government, it requires Knesset legislation—an uncertain prospect, especially in an election year. Strong opposition from contractors and economists to reviving a tax abolished 25 years ago further dims its chances. The expected NIS 5 billion in revenue was intended to fund expanded income tax brackets.
- New surtax on real estate investors: A proposed 2% surtax on investors selling non-residential properties—on top of the regular capital gains tax—has been blocked in the past and remains off the table until the budget is passed.
- Income tax reduction: The most significant tax relief proposal for 2026 has not yet been approved. If passed in March, it could grant retroactive relief of hundreds or even thousands of shekels to employees earning around NIS 16,000, with changes to multiple brackets. For example, a uniform 20% tax rate would apply to income between NIS 10,061 and NIS 19,000, instead of 31% starting at NIS 16,000. The 35% bracket, currently starting at NIS 22,441, would begin at NIS 25,101. Implementation hinges on securing funding.
- Check discounting limits: New restrictions are proposed on cashing postdated checks. Under updated “cash reduction” laws, cash transactions (including checks) over NIS 6,000 would be limited, and holding over NIS 200,000 in cash would be banned. These rules have not yet been approved and cannot be applied retroactively.
- Rental income reporting: To combat tax evasion in the rental market, the Finance Ministry proposes that even landlords earning below the taxable threshold (currently NIS 5,654/month) must report rental activity. If approved, this database would help the Tax Authority improve enforcement and potentially raise an additional NIS 130 million annually. The change would apply retroactively.
- New bank tax: Smotrich’s proposed tax on banks has not yet passed and faces resistance, including a legal petition to the High Court of Justice. If approved, it may still be implemented retroactively from January.
- Vehicle fee reductions: The ministry has proposed eliminating the roadworthiness test for new vehicles for the first four years instead of three. From the fifth year, cars would be tested only in years 7 and 9. Annual tests would resume from the 10th year. The internal driving exam for license seekers would also be eliminated, saving students up to NIS 250. These measures await final budget approval.
- Tax on e-cigarettes: A new fixed tax of NIS 1 per milliliter of vaping liquid and NIS 30 per e-cigarette device is planned but cannot be enforced until the budget passes and cannot be applied retroactively.
- Tax exemption for new immigrants: A plan to grant tax exemptions to new immigrants during their first years in Israel, starting with those arriving in 2026, has not yet taken effect. Critics argue the benefit primarily aids high earners. If approved, it would apply retroactively.